Home equity (the value of your home minus your mortgage debt) is a valuable but often overlooked retirement asset. If you have a hole in your retirement plan (something you want or need to fund), you can probably fill it with home equity.
Too many people don’t save enough for a secure retirement, but home equity can make up the difference between how much you need to save and what you actually have.
So let’s take a look at 1) ways to leverage home equity and 2) common ways people leverage home equity during retirement.
1. How can I leverage my home equity?
There are so many options for accessing home equity. They include:
Downsizing: Replacing your existing home with a cheaper one
When you downsize, you sell your current home and buy another, less expensive one. Depending on your existing mortgage, the value of your old home, and the cost of your new home, there are many potential benefits to downsizing. You may be able to:
- Forgive all mortgage payments (if the home equity in your existing home is sufficient to purchase a new home)
- You can receive a lump sum of cash (if the price of your new home is lower than the return on your old home)
- Reduce your mortgage payments (if you still need a mortgage, downsizing to a cheaper mortgage can reduce your payments and loan term)
- Reduce housing costs such as insurance, taxes, and maintenance costs.
this,[住宅と不動産]>[主な住居の将来の変更]Model it with the NewRetirement Planner at. (Also, go to Expenses to document how insurance and maintenance costs are reduced.)
Securing a home equity loan
Debt for retirement is not optimal, but a mortgage (especially if interest rates are low) can be considered acceptable. Home equity loans add to your debt. You will be borrowing a portion of the money you have built up in the equity in your home. This debt must be repaid and payments will begin as soon as you secure the loan.
You can also model this in NewRetirement Planner. Simply add non-mortgage debt to the debt section of My Plan.
rent out a room, part or all of your house
Depending on how you want to live, you can rent out part or all of your home.
- Why not consider living Golden Girls style by renting out part of your home?
- Or are you ready to go out and travel and plan to rent out your home long-term or at certain times of the year?
NewRetirement Planner[収入]>[受動的収入]Add this income using sections.
Use a reverse mortgage
A reverse mortgage is a type of loan that does not require repayments while you continue to live in your home.
The federally insured Home Equity Conversion Mortgage (HECM) program allows homeowners aged 62 and over to borrow against the value they have built in their home. Borrowers can use the proceeds to pay off the remainder of their existing mortgage, which is also one of the requirements of the loan. The remaining funds can be used at the borrower’s discretion.
This too,[住宅と不動産]>[主な住居の将来の変更]You can model it with the NewRetirement Planner located at .
Cash advance and rental
Depending on the real estate market where you want to live, renting may be a better option than buying. And this too can be modeled in Planner.
2. Common reasons why people use home equity in retirement
A retirement plan is a complex equation of unknown risks, assets, income, expenses, debts, obligations, values, goals, and priorities. And all too often, savings, benefits, and retirement income are inadequate for your retirement needs, wants, and unexpected expenses that may arise.
Home equity may be able to fill that gap. Consider a relatively common way people use home equity to fund their retirement.
Bridging financial crises, emergencies, or other needs (home equity is a good backup plan)
Now, let’s say your investments are currently declining. However, you will need to make withdrawals for expenses. You don’t want to sell when the market is down, but you need cash.
Well, if you have home equity, you can tap into that pool of money instead of investing to plug the bottom of the market.
The same principle applies to other unexpected expenses that may arise after you retire. You just have to weigh the cost of leveraging your home equity against the cost of securing the needed funds from savings or other assets.
Use the NewRetirement Planner to run through “what if” scenarios to help you decide on the best path forward.
consolidate debts
Mortgage debt is often more advantageous than other types of debt because interest rates are usually lower and it is tax deductible. If you have debt, you may want to consider using it to pay off your mortgage. This can reduce your lifetime debt payments and improve your monthly cash flow.
I don’t know? You can model the following in NewRetirement Planner:
- Create a new scenario in Planner
- The new scenario removes the non-mortgage debt and adds a new debt representing the home equity loan.
- Compare the two scenarios.
long term care fund
You never know if you will need long-term care in the future, and if you do, it could be cost-prohibitive. It’s fairly common for people to leverage their home equity to fund this type of care. You can also sell your home and build a retirement home or take out a reverse mortgage (or home equity loan if you qualify) to pay for home care.
To model this in NewRetirement Planner, follow these steps:
- In the Expenses & Health Care > Long-Term Care section, specify that you intend to use home equity to cover long-term care.
- [住宅と不動産]>[将来の変更]section estimates when care will be needed and models how to release housing equity.
Prepare for living expenses after your savings are exhausted
The good news is that we live relatively long lives. The bad news is that a long life requires a lot of savings. If you run out of savings first, you can use your home equity to finance your longevity.
Why not model this and see how long your home equity lasts? Use the planner to determine the age at which your savings run out, and see how you can improve your home equity in the Home & Real Estate > Future Changes section. Model what you want to release.
Reduce expenses and improve your lifestyle (perhaps in a better place to live in retirement)
Downsizing is one of the best ways to cut expenses. You can downsize to eliminate or reduce your mortgage and reduce your cost of living while preserving your accumulated home equity for future emergencies.
And there’s a good chance that a less expensive location is better suited to the life you want to live in retirement. This is especially true if you have many opportunities to retire abroad.
To model this type of relocation, you need to:
- First, model the relocation in “Housing and Real Estate” > “Future Changes”.
- Go to Expenses and document the expected cost savings after the move.
Use home equity to improve your lifestyle
It’s true that many households don’t have enough retirement savings to live the life they want.
Depending on your overall financial situation, you may be able to judiciously leverage your home equity to make up the difference. We say this cautiously because preserving home equity for emergencies and other important expenses is a wise strategy.
If you plan to use home equity to fund your retirement, make sure you fully understand how you’ll pay for medical expenses, the possibility of long-term care, and the possibility of a longer-than-expected life expectancy.
early retirement
Just as you would use home equity to fund lifestyle improvements, proceed with caution if you want to use your home for early retirement. It is possible and can be a good option, especially if you have accumulated a significant amount of equity and can downsize to a much cheaper residence.
You just want to make sure you have enough capital in case something unexpected happens in the future.
Tips for leveraging your home equity
Create a multi-step retirement plan
You will probably live long after you retire. And a house that is perfect for him when he’s 50 or 60 may not be right for him when he’s 70 or 80, much less when he’s 90.
By planning ahead, you can better predict and possibly reduce your housing costs. You may want to continue living in your parents’ home for now, but once you reach certain milestones, it’s time to downsize. Or, conversely, you may want to sell your current home, cash out your home equity now, live an adventurous life abroad for a few years, and then return to your downsized location. .
Because housing is such an expensive retirement expense, planning for these changes can have a big impact on your overall retirement wealth and security.
Are you relocating?think about taxes
Families often move to areas with higher property taxes because they want their children to receive the best education possible. If your children grow up and are no longer in the public school system, it may make sense to move to another school district with lower property taxes.
Some states are known for being retiree-friendly, with low or no sales or income taxes. For people living on a fixed income, there are some areas that can benefit from lower living costs.
Additionally, taxes on the sale of a home can be an issue, especially if home prices have increased significantly.
Be sure to research the tax implications of moving.
Care must be taken when utilizing housing assets early in retirement
A home can be a great backup plan for a variety of unexpected events and situations that you may encounter during your retirement.
Therefore, you should be careful about using up your housing assets too early after retirement.
Think outside the box: Retire abroad
Retiring abroad can be a major lifestyle upgrade and significantly reduce your expenses. This is a double whammy of a good thing. Here are 24 tips, lists, and quizzes on the best places to retire.
Confused about moving abroad? How about a tiny house?
Run a What If scenario
NewRetirement Planner is a great way to run through scenarios to see the financial impact of buying or selling a home. You can model downsizing, upsizing, second homes, and using equity to fund retirement or long-term care.
See how housing scenarios affect your net worth, lifetime property value, cash flow, tax liability, and other key metrics.
And running through these “what if” scenarios can help you imagine different future possibilities, which may help you decide what you want out of life.
Create and maintain a retirement plan that works for you, no matter where you live
Your home is usually your most expensive expense, as well as your largest asset. It is also a major factor that affects quality of life. That’s why we recommend considering housing as one of the most important elements of your overall retirement planning. Perhaps even more important than savings.
Housing is one of the hundreds of overlooked tools people need to build a safe and happy future.
Use the NewRetirement Planner to explore over 250 different inputs and find your path to a safe and happy future.
